# Unit Title Interpreting The Final Accounts Calculate the Essay

Unit Title : Interpreting The Final Accounts

Calculate the following ratios for the business owned by David

1a.

1b.

## Sales Revenue 30,000

1c.

1d.

### Give two examples of limitation

One limitation of using ratio analysis is that it doesnt take into account factors such as product quality or the level of customer service. It only looks at figures found in the final accounts.

This will not represent the total picture of a business. The are many factors which a business will need analysis of to operate successfully that ratio analysis does not cover. Another limitation of ratio analysis is that the figures from the final accounts may not be accurate which would lead to inaccurate analysis. Businesses may intentionally record figures inaccurately for many reasons such as to inflate numbers or defraud potential investors. An example being Tesco where high level employees knew figures were wrongly recorded making the company appear financially healthily (Wylie and Wardle, 2017).

1e.

### Explain which business is better

Jane Enfields business appears better by looking at the accounting ratios provided. The reason being is her return on capital employed (roce) is higher by 7%, Janes being 20% compared to the 13% of Davids. The roce indicates the return (profit) made from a monetary investment in the form of a percentage (Cox and Fardon, 2010). This would show Jane is making more of a return from her money invested in her business compared to Davids investment making her business better. As she is more effective in using her assets to create profit.

Using the figure from Trading Account calculate the following

2a.

### Rate of Stock Turnover

Opening Stock + Closing Stock = Average Stock 30,000 + 10,000 = 20,000

2 2

Average Stock x 365 = days 20,000 x 365 = 28 days or 13 times p.a.

2b.

## Mark-up

Gross Profit x 100 160,000 x 100 = 62%

## Cost Of Sales 260,000

2c.

Specify the year, which has better performance. Give two reasons to support your selection

2d.

Make a recommendation to another department

Calculate the following ratios for 2015 and 2016

3a.

### Return On Capital Employed

Net Profit x 100 12,000 x 100 = 10% (2015) 20,000 x 100 = 18% (2016)

## Gross Profit Margin

Gross Profit x 100 50,000 x 100 = 25% (2015) 70,000 x 100 = 25% (2016)

## Net Profit Margin

Net Profit x 100 12,000 x 100 = 6% (2015) 20,000 x 100 = 7% (2016)

## Stock Turnover

Opening Stock + Closing Stock = Average Stock 40,000 + 20,000 = 30,000 (2015)

2 2

40,000 + 30,000 = 35,000 (2016)

2

Average Stock x 365 = days 30,000 x 365 = 73 days (2015) 35,000 x 365 = 61 days (2016)

### Cost Of Sales 150,000 210,000

3b.

State the possible reasons for and significance of any change in the ratios shown by your calculations

3c.

Relate the company performance to economic climate of the period

Calculate the following ratios for 2015

4a.

### Return On Capital Employed

Net Profit x 100 50,000 x 100 = 5% (R Ltd) 58,000 x 100 = 9% (T Ltd)

## Current Ratio

Current Assets 1,250,000 = 3.86 (R Ltd) 687,000 = 7.63 (T Ltd)

## Acid Test

Current Assets – Stock 1,250,000 – 490,000 = 2.35 (R Ltd) 687,000 – 240,000 = 4.97 (T Ltd)

### Debtor Collection Period

Debtors x 365 days 680,000 x 365 days = 124 days (R Ltd)

## Sales 2,000,000

320,000 x 365 days = 83 days (T Ltd)

1,400,000

## Creditors Payment

Creditors x 365 324,000 x 365 days = 79 days (R Ltd)

### Cost Of Sales 1,500,000

90,000 x 365 days = 37 days (T Ltd)

900,000

4b.

Identify a problem and give recommendations to a related department

5a.

Describe what this information indicates about the differences in approach between the two businesses.

5b.

Make a suggestion for future activities

## Reference List

Wylie, C. and Wardle, S. (2017). Three former Tesco bosses have been accused of ‘cooking the books’ as a fraud trial begins. [online] The Independent. Available at: [Accessed 8 Mar. 2019].

Cox, D. and Fardon, M. (2010). AS accounting for AQA. 2nd ed. Worchester: Osborne Books Limited.